CHICAGO — Food and beverage executives running middle-market companies, those with sales between $10 million and $1 billion, are still concerned about commodity cost volatility, but their attention has shifted in the past few years to mining greater efficiencies from their operations.
“The concern about commodities is always going to be there, but it seems to be fading,” said Chris Nay, senior managing director of food and beverage for GE Capital. “In 2013 and 2014, companies are very focused on operational efficiencies as opposed to worrying about commodities.
“As we looked at it, around 2008 and 2009 rising commodity costs hit companies hard as retailers tried to hold their price points. As a result, companies have made changes to how they work with customers; they have moved to tolling arrangements. They may not be making as much margin, but they are better able to tolerate commodity swings. Since 2009 and 2010 there has been a big move to de-risk with hedges and supply agreements.”
GE Capital conducted a survey of C-suite executives with 50 middle-market food and beverage companies earlier this year. The results of the survey indicate using efficiencies to lower cost is a primary goal. Seventy-three per cent of the survey’s respondents said they plan to increase operational efficiencies while 50 percent plan to invest in automation and 45 percent plan to upgrade or replace equipment.
“I think there is a lot of room to run on the efficiency side,” Nay said. “If you go back and look at how old some of these plants are and realize what they can do with the right technologies. High pressure pasteurization (HPP) equipment is changing the way suppliers are thinking about what the consumer wants; it is changing how people think about the freshness of products. That is driving a lot of technology and operational efficiency. There have also been big changes in automation and that is what makes me believe there is a lot of running room from an efficiency standpoint.
“The other thing you have to consider is what the customers want as well. Companies like Wal-Mart, Costco, McDonald’s and Yum! all have sustainability scores. So companies are prompted to try new things to get more efficient, because when you combine the alternative energy sources and efficiency, for example then you have both social and business benefits.”
Nay added that GE Capital is seeing a lot of investment in the good-for-you space, but the field is crowded and challenging.
“Creating a brand is very hard right now with the proliferation of stock-keeping units (SKUs) among lower middle market companies,” he said. “You need a strong concept, like creating a brand around an avocado 100-calorie pack that people are buying. Another example is the move into the coffee industry, where we are seeing a big change from bagged coffee to single serve. That is a big transition for companies selling to retailers and distributors, because consumer preferences are changing.
“Another example is natural juices, where you are better served making a fresh product. This is creating a market for things like HPP equipment. As consumer preferences move to fresh and healthy, it is changing the need for equipment. I am hearing from our customers that they are trying to figure out fresh and that is changing some factory floors.”